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What Is Stock

What Is Stock?

Most people know something about the stock market, but many investors who see stock as a way to get rich quick might not understand exactly what stock is and how it works. Before jumping feet-first into investing in stocks, it is important to understand some of the basics and the risks involved in owning stocks.

A company can raise money by “going public” and selling a portion of the company by issuing stock; this is called equity financing. The advantage to the company is that it doesn’t have to pay back the money or pay interest right away, as it would to a bank if it borrowed the money it needed. The advantage to the shareholder is the potential to make money through dividends and/or capital appreciation.

Dividends are taxable payments to shareholders from the company’s earnings. They are generally paid quarterly in cash, but there is no guarantee that dividends will continue to be paid. Capital appreciation is the difference between the amount paid for a stock and its current value. Shareholders also have the ability to trade their stocks on an exchange at any time.

Stock is quite simply a share in the ownership of a company, which is why stockholders are called shareholders. When you buy stock, you are actually buying a piece of the company it represents; you have a claim on part of the corporation’s assets and earnings.

As a partial owner of the company, you therefore take on the potential risks and benefits of that position, but you don’t have to put any effort into running it. Your ownership is determined by the number of shares you own divided by the total number of shares sold by the company. For example, if a company has issued 1,000 shares and you have 10, you own 1 percent of the company. Of course, if you own 10 shares of a large company that has issued millions of shares, your equity in the company is quite small.

If a company is profitable, it may